Proponents of big government and haters of the rich are making a big deal about $21 trillion that is being hidden in tax-free offshore accounts. The Observer reports:
A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.
James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, The Price of Offshore Revisited, released exclusively to the Observer.
He shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is, as Henry puts it, “protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy”. According to Henry’s research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than £4tn in 2010, a sharp rise from £1.5tn five years earlier.
The information I wanted didn’t appear until paragraph eleven:
Assuming the £13tn mountain of assets earned an average 3% a year for its owners, and governments were able to tax that income at 30%, it would generate a bumper £121bn in revenues – more than rich countries spend on aid to the developing world each year.
That £121 billion is about $200 billion. The global budget deficit runs at about $3.5 trillion or 5.3% of GDP. (The United States leads the way with a deficit of $1.3 trillion or about 9.3% of GDP.) If these hidden assets suddenly became taxable, the global budget deficit would decline by about 6%, assuming the governments don’t just spend the newfound money.
No plan to “tax the rich” or “close loopholes” can possibly reduce the budget deficit by a significant amount. As I noted previously, the U.S. government would need to double income tax rates to close the budget deficit. Obviously, this is unfeasible because tax avoidance would rise when the “wealthy” are faced with a 70% income tax rate in addition to state and other taxes. Additionally, this doubling would also apply to the poor and middle class.
The government simply cannot raise taxes enough to make any significant dent in the deficit. The idea of taxing “hidden” money would only solve 6% of the problem and that excludes the cost of enforcement. Maybe we should focus on the other 94% of the deficit rather than the 6%.